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Successful IPO of Indian joint venture bodes well for Standard Life Aberdeen investors, says Numis

Published: 11:18 22 Nov 2017 GMT

standard life office front
Numis believes SLA shares are “too cheap” considering the cash surplus and potential £200mln of cost synergies

The recent successful initial public offering of a life insurer over in India could bode well for Standard Life Aberdeen PLC (LON:SLA).

Mumbai-based HDFC Life is a joint venture between the recently-merged Scottish investment giant and Housing Development Finance Corporation.

READ: Standard Life Aberdeen receives UBS upgrade on expected cost synergies of merger

It made its debut last week at a price which City broker Numis reckons was up to double what Standard Life Aberdeen had expected, while shares have also rocketed in the few days since.

HDFC IPO worth £367mln to SLA

The brokerage estimates that SLA netted £367mln or 12p a share of tax-free cash proceeds from the listing of HDFC, in which it still holds a 29.6% stake.

“We think there is a reasonable chance that SLA could return the 12p/share IPO proceeds to shareholders via a special dividend at the FY17 results (23/02/18): it already has ample surplus cash and there is precedent from the SL Canada disposal in 2014,” writes analyst David McCann.

“This would mean a special yield of 2.8%, in addition to the ordinary FY17E yield 5.0% (based on 23.1p DPS, expected to grow c.8% p.a.).”

McCann adds that SLA is currently valued on a forward price-to-earnings ratio of 13.6x, but once surplus cash, the residual holding in HDFC, money from the float and other things are taken into account, the ratio is more like 10.3x.

If medium term cost synergies of around £200mln are factored in, the analyst gets to a P/E of just 8.6x.

Upgrade to ‘add’, price target also bumped to 505p

“We do not believe that 8.6x fairly reflects the prospects for the core business. We therefore upgrade our recommendation from ‘hold’ to ‘add’, alongside our target price increasing from 481p to 505p (+5%), mainly to reflect the increase in HDFC Life price post IPO.”

McCann cautions that it is possible full-year results (due at the end of February) “will read badly for the core business” in terms of significant outflows and merger disruption, although he believes this should be factored into consensus somewhat.

SLA shares were down 1.2% to 424.3p.

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